If volatile markets are driving your clients to consider locking in lifetime income through a variable annuity guaranteed lifetime withdrawal benefit, deals soon could improve.

New on the horizon: Contingent annuities. These programs, if navigated carefully, not only could slash the high cost of variable annuities, but also offer more favorable tax treatment for high-tax-bracket investors. You wouldn’t need to transfer clients’ assets to an insurance company. Instead, an investment manager can manage the money, paying the insurance company exclusively for the insurance that guarantees a client’s lifetime periodic income.

Contingent annuities, so far, lack the death benefit typical of variable annuities. When a policyholder dies, variable annuities often are guaranteed to pay the beneficiary the investment’s market value or the original principal, whichever is greater.

Contingent annuities also lack another major benefit of variable annuities: Tax deferral of contributions. Nevertheless, upon taking distribution, those in higher tax brackets could save big bucks—at least until assets are depleted and the insurance guarantee kicks in. Rather than paying the ordinary income tax rate—as much as 35 percent—on a portion of your annuity’s distributed income that represents earnings, you’d pay tax at today’s lower 15 percent capital gains rate. Once the insurance guarantee kicks in, though, ordinary income tax may be owed on a portion of your payments.

Beware that tax treatment, not to mention current tax laws, could change.

Right now, this stand-alone guarantee is only believed to be widely available from money managers through The Netherlands-based AEGON’s Transamerica Advisors Life Insurance, Little Rock, Ark. That company is A+ rated by A.M. Best, Oldwick, N.J. The program specifies a series of eligible no-load funds and exchange traded funds as well as specific permitted investment mixes through such fund families as American Funds, iShares, PIMCO, Vanguard and Dimensional Fund Advisors.

But if this interests you, keep your eyes peeled. The contingent annuity could become available directly to the public later this year, says David Stone, CEO of Aria Retirement Solutions. His San Francisco-based company administers the contingent annuity program, known as “RetireOne Transamerica.”

The contingent annuity is designed for pre-retirees seeking to protect assets before they retire and retirees seeking to control assets, yet generate income from them, Stone says.

While it could be expensive to work with a money manager, Stone suggests that clients can save around half the cost of a traditional variable annuity if they shop around and select low-expense fund offerings. “Not every adviser charges 1 percent (for assets under management)” he adds. “Some charge an hourly fee and some charge a flat fee.”

It could be wise to wait and see what happens with this type of insurance protection. The National Association of Insurance Commissioners, at this writing, was reviewing concerns and possible regulations on contingent annuities.

Some insurance companies, like MetLife, the second largest variable annuity provider behind TIAA-CREF based on Insured Retirement Institute data, are worried.

MetLife, which says it has no plans to offer contingent annuities, has argued that insurers may prove unable to adequately manage their risks if they don’t hold assets directly. Without fees generated by assets, they won’t get as much income to cover their added risk. MetLife also questioned whether state insurance guaranty associations would be able to cover benefits as they do with standard variable annuities.

In fact, Fitch Ratings, New York, has warned that the mispricing of these programs could lead to significant financial problems for the life insurance industry down the road.

Insurance regulators are hotly debating contingent annuity issues, says Doug Meyer, Fitch Ratings managing director of corporate finance. Among those: Whether it actually is insurance, who should regulate it, and what reserves and capital should be required for it.

But Meyer stops short of recommending that investors hold off purchasing a variable annuity and wait for more attractive contingent annuity offerings to come down the pike.

“Maybe it’s all about choice,” Meyer says. “This sort of new offering provides greater choice for the consumer.”

Although Vanguard mutual funds are included in the Aria Retirement Solutions offering, the low-fee mutual fund and exchange traded fund provider has questions about contingent annuities. Vanguard might offer it at some point, according to John Ameriks, head of Vanguard Investment Counseling and Research. “But we’re nowhere close to that point,” he says. “How do we monitor what funds people are holding and make sure the terms of the agreement are being upheld?”

Vanguard already offers one of the industry’s lowest-cost variable annuities to investors, he says. Including mutual funds, expenses average about 0.59 percent. That, he says, includes a limited death benefit, lacking downside protection, but guaranteed to pay the accumulated market value to the policyholder’s beneficiary if the policyholder dies. If you choose to add a guaranteed lifetime withdrawal benefit to lock in periodic income, you pay another 0.95 percent.

A lot of insurance companies, he says, “are on the sidelines looking at this very closely with the idea of entering the market…”

TIAA-CREF, the nation’s largest variable annuity issuer, known for its low cost, declined to comment on whether it would offer a contingent annuity.

Russell Forkey, a Fort Lauderdale, Fla., securities attorney, says the key to getting involved with any annuity—contingent or not—is to understand the contract your client signs.

“What happens in the annuity business is everybody is trying to be one step in front of their competitor,” he says. “As years have elapsed, benefits increase and decrease depending on the profitability of companies. Every benefit you get costs money.”